The Money Hunter

Warren Buffett’s track record, the Power of Compounding Return and the Story of the Ugly Ducklings

Warren Buffett’s real track record

 We all know Warren Buffett’s as one of the richest men in the world and the most successful investor of all time. But few really know what is Warren Buffett’s actual track record. To be the richest man in the world, surely he doubles or triples his money every year. It is a logical assumption. You will be pleasantly surprised. Over the years since 1965, Warren has “only” achieved an average return of 20.3% annually. (Depending on how recent you compute his average returns but that is his records.) If you compare that to some star hedge fund managers and even some retail investors, 20% annual return is nothing worth shouting about.

How can this be? We are talking about the richest man in the world (his best friend Bill Gates beat him occasionally but the verdict is still out)! The magic is the power of Compounding Returns and Consistency. Take a calculator and key in “$1000”, multiply it by 1.2. And then multiply it by 1.2 and do it 47 times. You get $5,266,457.26. If that is too much work, key this in your Excel spreadsheet “=1000*1.2^47). That is 5266 times over a period of 47 years with a mere $1000. This is a simple illustration excluding dividends and other profits. Warren succeeds phenomenally because he delivers consistent results unlike the one-hit wonders you read in business and investment magazines. These “star” hedge fund managers make a stunning profit in one year by making a clever bet, win all the industry awards, brag about their one-time success in all the marketing brochure and fail to deliver the next year. Oh, I forgot one more thing. You need to live long too.

What are the lessons we can learn from Warren Buffett?

As retail investors, we ought to be brutally honest with ourselves. I often hear amazing success stories from retail investors. They make a stunning return with one investment and without doing the mathematics, claim they are super investors who can return 50% a year. Of course, they sweep their other losses under the carpet. The key point is consistency. Investment is a long distance run for people who have the right vision, patience, temperament and intelligence. It is fundamentally different from gambling or get rich quick bets. It is not enough to win a race a year, you must consistently win every race every year.

 As professional managers, we should think longer term. Warren’s teacher Benjamin Graham has introduced us the power of Value Investment. Conceptually, it is to buy assets below its intrinsic value (“fair value”) whenever the markets misprice the asset or are slow to pay attention to it. My investment teacher, Eric Kong, who is a long-time partner and mentor, (rated top-ten Asia fund manager by Mercer when he was running a fund) explained this concept using a simple analogy. It is like picking an ugly duckling in the pond when other ignore it and you have the foresight knowing that it will grow up to be a swan. I told him that this requires incredible intelligence and maybe a lot of luck. He smiled and told me something even more stunning. The problem with most investors is their obsession with chasing the most beautiful birds in the pond. Competition for an asset means unrealistic pricing like the recent Facebook with a price/earning ratio of 75 times. It takes 75 years before you can recoup your investment in Facebook if its profitability stays stagnant. The real secret in value investment is not to chase the hottest stocks or follow the “star” managers but to invest in a portfolio of companies that have a good sustainable business models and yet they are priced fairly because the rest of the investors take no notice of them. To stretch the analogy further, by picking a group of young, promising ducklings that are presently ignored by the rest, you will have a statistically higher chance of super returns than fighting with the rest who misprice their prized birds.

We learnt these core lessons in IOC. We believe in value investment. We walk the Warren Buffett Way but we adapted his Way into the Asian investment arena. We hunt our deals diligently and carefully like Warren Buffett but we are also cognizant of the inherent complexities in Asia. We invest in a successful global franchise (one of Warren’s most successful investment is in Macdonald Restaurant) and combine that with investments in pre-IPO technology companies. Along the way, we will evolve and get even better at what we do but our core investment philosophies will always remain the same. “Transform. Create. Value.” – will be our key principles.

Lesson for Parents on Computing or Bill Gates, Angry Birds and Slutomaniacs

It is always a bad pun to put Micro Soft next to Angry Birds so if you miss the joke, that is okay.

In the landmark book on digital development, Bill Gates wrote in the Road Ahead about digital divide. He was worried that the developing countries (ie poor people) have no access to the Internet and the developed countries would widen the wealth gap because information is really power. The children with no access to information access devices will be severely disadvantaged. For years, the "digital divide" issue was debated, argued endlessly among educators and policy makers. In MIT, I heard Digital Media Lab bragging about the US$100 PC, powered by cranking the dynamo and all kinds of cheap computing solutions. It turned out that Mr Gates was slightly off target and his fears were unfounded. And China can produce anything at whatever price point as long as no royalty is paid. "Copyright means copy is right" to use my favorite term.

The reason why Mr Gates is slightly off target is this - in the latest studies, they found the poorer and lower IQ children spending MORE time on the Net than their more successful peers. As digital technology becomes cheaper, poorer people can afford it. They found out those who hog the Facebook (check in every 5 min), dominate the Twitter sphere and play casual games like Slutomaniacs addictively are, by default and for lack of a better word, stupidier and poorer. It was never the digital divide. It is the mental divide.

The technology and the information medium were irrelevant. If you are ambitious, clever and hardworking, you will figure out how to use whatever at hand to connect, contract and collaborate. If you have gunpowder, you can choose to develop canons to rule, rob and plunder or you can make firework to impress the emperor. No matter the technology, the retard class will figure a way out to abuse it and to find ways not to generate benefits for themselves and their fellow human beings. I am sure you remember the old saying that TV addiction is bad for you. Now you can carry the TV in your pocket and more!

To make things worse, studies have found out casual iPhone games are getting simpler although the iPhone computing power has increased over the generations. In Angry Birds, you have to understand simple Newtonian principles. You have to think. With Slutomaniacs, you merely need to click randomly at the digital slot machine.

Rovio, the inventor of Angry Birds, tried to come up with another hit called Amazing Alex which is a Rube Goldberg toy on iPhone. You or your kids would learn gravity, kinetic energy, momentum, gears and host of physics concept in a fun way but the game did not go viral. So if the trend continues, the games will be more like the casino games in which you don't really need to think and the only difference is that the iPhone game developers don't compute Revenue per minute of each customer (which all casinos do). And there is another sub-retard class of humans who attend classes on how to beat baccarat or poker to beat the odds in casinos. Maybe the future iPhone game bestseller is like flash cards of semi naked models and you don't even need to click. The game auto decides for you.

My Foundation partner Jhin joked that there is a group of humans who are turned on by flashing or garish lights. They are called Photo-erotic people. Or more accurately photon erotic people. Now you know why it is called red light district. That's why I keep a few torchlights in my bedroom just in case. The new iPhone app hit may be just some flashing graphics. The end point is mind bogglingly tragic.

What can you do as a parent?
I am often amazed at parents who take pride when their young children can play the iPad and iPhone obsessively. It is as bad as feeling gloriously superior when you succeed in flushing the toilet. Or you start tearing when the kid open the fridge door. Using touch based computing device will be like using toilet paper- you ought to know how. In fact, parents should know how to limit the exposure to such devices. The kids' brain neurons are forming at that tender age- you want him to explore the planet, you want him to read and you want him to have fun. He should Play, Play and Play because playing make mistakes and make him try new things. Steve Jobs' parents allowed him to take apart electrical devices at a young age and he is never in trouble if he can't put it back again. If a kid's world is confined to a small screen, watching every cool top hit viral video, playing every brainless game, he is 100% focked for life. (My surname allows public swearing with no consequence). You basically ruined his natural development. As usual, knowing how to use the iPad or iPhone or Android tablet is a GOOD thing but get the balance right. Make him curious about the world beyond the tech toys. That, I think, is the greatest love of all.

What can you do as a policy maker?
I presented a paper at the mandarin hotel in a symposium arguing that the future of Space belong to Asians not the Americans nor Europeans. The west has turned inwards in their outlook. Western kids no longer think going to space is cool. They want to build the next Facebook. They stop thinking BIG and GRAND. The Chinese kids are different. They want to build Moonbase Alpha. And if you piss them off, will launch a kinetic kill weapon from their orbiting station. Just Kidding but their perspective of what is great is starkly different. So policy makers and educators must encourage the development of BOTH innerspace (or the passe term cyberspace) and outer space. Give kids a worthy and grand dreams.

If you have a nation of fingers twitching kids whose visions do not extend beyond the small screen, trust me, you won't even do well in the Durex survey because your kids do not know how to intereact with the opposite sex. And that is a very very bad thing from a Darwinian point of view.

One last thing.. Check out the movie Idiocracy. It is a comedy about humans continuing the iPhone (or Android) simplication trend. The comedy was made with usd2 million and made only usd0.5 mil. A colossal failure in the box office. But it has become a cult favorite among the scientist community. But I suspect we don't want to see the dark horizon ahead. There is always Slutomaniacs to forget.

Harold Fock